How Optimistic Is Small Business? Why Even Ask?

A monthly survey of executives led to a sharp plunge in the "small business optimism index" — down 2.6 points, to a near-record low score of 85.2 — showing how economic worries are swelling in that huge segment of the economy.

The 35-year-old survey by the National Federation of Independent Business (NFIB), which polled 805 people in December, had recorded a lower level of optimism only twice, during the recessions of 1974-75 and 1980-82.

"Unless there is a solid turnaround in January, we are in for a longer-than-usual recession," said William Dunkelberg, the federation's chief economist.

The survey showed that average employment per firm declined by 0.86 workers, the largest monthly decline in survey history. In 26 percent of cases, employment was reduced, an average of 4.2 workers per firm. Owners increasing employment totaled only 8 percent, with the average increase per firm being 3.2 workers.

Still, many small companies did report having put out help-wanted signs, only to have trouble finding the right person. According to the survey, 40 percent of owners hired or tried to hire in December, and 75 percent of those in the hiring mode reported few or no qualified applicants for the openings. In fact, 7 percent of owners reported that availability of qualified labor was their top business problem, although the total was down from 17 percent in September 2007. Altogether, 14 percent of companies reported having unfilled openings — still far from the historic average of 22 percent.

Even as small business owners reported trouble with hiring, a growing number of respondents said they were cutting pay. According to the survey, 7 percent of owners reported reducing worker compensation, a survey-record high. Just 12 percent reported raising worker compensation, a survey-record low.

The NFIB small-business results appear to track the downturn of sentiment across the broader base of executives tracked by the CFO Magazine/Duke University Global Business Outlook Survey. At the end of November and beginning of December it found 81 percent of finance executives saying that they were less optimistic than they were last quarter. Most expected their economic misery to last for at least a year. Nearly 60 percent of U.S. finance chiefs in that survey did not expect the domestic economy to begin to recover until the fourth quarter of 2009 or later.

As the NFIB survey looked toward the future, 19 percent of respondents planned job cuts, while 8 percent plan to create new jobs. The result: a seasonally-adjusted net negative 6 percent of owners creating jobs. (Again, lower readings occurred only in the 1974-75 and the 1980-82 recession periods.)

Capital spending is also being subjected to the small-business paring knife, the NFIB survey shows. It recorded 51 percent of owners making capital expenditures during the last six months, down five points. (The largest segment shelled out for new equipment, followed by those acquiring vehicles, and those improving or expanding facilities.) Those planning to make capital expenditures over the next few months fell four points, to 17 percent, lower only in the 1974-75 period.

"In this uncertain environment," said Dunkelberg, "owners are postponing any capital projects that are not essential to the operation of the firm — or that they can't afford or can’t finance."

In addition, small business owners continued to liquidate inventories. According to the survey, a net-negative 21 percent of owners reported gains in inventory stocks, the ninth negative, double-digit month in a row, and nineteenth negative month in a row.

Meanwhile, as the economy weakens loan demand has come down as well. Just 33 percent reported regular borrowing, near the record low of 31 percent, for example. And the economic slowdown also has caused the credit worthiness of many potential borrowers to deteriorate over the last year, leading to more difficult terms and higher loan rejection rates.

Even so, 32 percent or respondents reported all their borrowing needs met, compared to just 6 percent who reported problems obtaining desired financing.